Townhouse development and CGT

Discussion in 'Accounting & Tax' started by Jobin Mani, 13th Oct, 2020.

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  1. Jobin Mani

    Jobin Mani Member

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    Hello all
    I am at the completion of 4 X Townhouse development in Melbourne, selling two and keeping two for rental to avoid all sale fall into same financial year. By keeping 2 X Townhouse for more than 12 months will get the eligibility of 50% CGT?
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    No. Are you aware of TD 92/135 ? It explains how an asset held for either business purposes (trading stock) or a isolated profit making isnt actually a CGT asset. Profits are ordinary income and subject to tax.

    Personal tax advice on all the tax issues would have been wise. eg GST, tax credits, GST withholding, tax on profits and more

    Renting two will also mean a GST clawback on some GST since you now have a mixed supply (eg rents are input taxed plus sales are a taxable supply)
     

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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The starting premise with a 'development' is that CGT does not apply. It is on revenue account and taxed as income under s6-5
     
  4. Jobin Mani

    Jobin Mani Member

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    Income from 2 X Townhouse sale will be ordinary income tax. But my confusion is if I keep two for more than twelve months CGT will be applicable?
     
  5. Jobin Mani

    Jobin Mani Member

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    Thanks Paul, My accountant explained about clawback on GST for the stock i am keeping and ordinary tax for the sale profit. He suggested keeping two for more than 12 months to get the CGT discount.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It could still be ordinary income
     
  7. Jobin Mani

    Jobin Mani Member

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    Thanks Terry, can you help me to get more information the same.
     
  8. Mike A

    Mike A Well-Known Member

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    no. even if held on capital account once the development has commenced it will turn to revenue account and you have interaction between the cgt rules and revenue rules.
     
  9. Mike A

    Mike A Well-Known Member

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    get that advice in writing as it is wrong. at least can be used to reduce penalties during an audit.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It is not as simple as a paragraph over a forum. get some specific advice
     
  11. Jobin Mani

    Jobin Mani Member

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    Thanks Mike, is that means both CGT and ordinary tax applicable for sale of two townhouses in later stage.
     
  12. Mike A

    Mike A Well-Known Member

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    Yes

    1. The net profit is assessable under s6.5 in the year in which the contract is settled.

    2. the transaction is also potentially subject to tax under the CGT regime (having the 'net profit' assessed under s6-5 does not preclude the CGT regime from applying). The timing of the CGT event is the contract date

    3. Section 118-20 applies to reduce any resultant capital gain by the assessable income. This is referred to as an 'anti overlap provision'

    Example: Liz bought some land in 1990, as part of a profit-making scheme. In December 1998 she sells it.

    Her profit from the sale is $40,000 and is included in her assessable income under section 6-5 (about ordinary income).

    Suppose she made a capital gain from the sale of $30,000. It is reduced to zero because it is does not exceed the amount included.
     
    Last edited: 13th Oct, 2020
  13. MRO

    MRO Well-Known Member

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    No disrespect intended to the OP, but i am amazed that people can spend millions on property development with very little understanding of the tax implications.
     
  14. Mike A

    Mike A Well-Known Member

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    amazes me as well but happens quite often. sometimes people do seek advice and don't like the answers they are given and go to accountants who are not skilled in property. it's generally only during an audit they find out how wrong things were. @Paul@PFI and I have seen so many errors made by other accountants it continues to amaze me why many even bother to venture into the property tax arena.
     
  15. Jobin Mani

    Jobin Mani Member

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    Thanks Mike for the information
     
  16. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Thats bad advice. Not a property savvy adviser to say that. Read TD 92/135. This explains the concept that the properties wont commence being a CGT asset hence a discount (or exemption) cant apply. You remain liable for the tax liability. Evasion and avoidance provisions apply.

    I'm with Mike. I often give second opinions and wonder if I should refer the original adviser to the TPB. I also see people and advise on the actual tax impacts and they dont like what I say. I recently was issued a notice by a ATO officer to disclose advice given to a former client who changed adviser after I explained how the return should be prepared. They didnt agree and wanted their dev reported as a discounted CGT event despite remitting GST on sales. One of the effects of GST withholding on a new property sale is that the ATO do check that the income is then reported. If its reported as a CGT event I can see a enquiry occurring. I can only imagine the ATO issued an audit decision that cites my earlier advice so all remission of penalties and safeharbour protection could be discarded. The ATO may even have concerns with the tax agent involved.